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The World Will Never Run Out Of Oil -- Might Its Price Tank?

While global demand for oil has moved to an all-time high, one long-established theory suggests that oil production (and consumption) might be peaking out. If this is the case, might its price tank?

If one thinks about it, the world will never run out of oil. As oil becomes scarce, consumers will necessarily turn to an alternative before the supply runs out. Whether it is due to a realization that oil is scarce – if only in an economic sense – or due to a concern for global warming, we can see the signs of a shift in consumption. Most automobile manufacturers have some pure electric or electric hybrid car project in development or in production. There are even hybrid Formula One racecars. (What would Enzo think?) It is only a matter of time that the automobile is electric. It seems not too far-fetched that oil consumption might drop.

Back in the 1950s, M. King Hubbert developed logistical models to predict points in time called “peak oil,” which is when the maximum rate of petroleum extraction would be reached. For the US, peak oil was the point in time when the maximum rate of US petroleum extraction was reached. Hubbert correctly predicted the US would reach peak oil in the 1965 to 1970 timeframe. His logistical models are now called Hubbert Peak Theory. Today, Hubbert Peak Theory is used predict peak oil points for oil wells, oil fields, regions, and countries with reasonable accuracy.

When Hubbert applied his models to global production, they pointed to a peak petroleum extraction being somewhere in the 2010 to 2015 timeframe. Separately, there have been a number of studies published by the Association for the Study of Peak Oil and Gas that reach a similar conclusion. Given the automobile industry’s current embracing of electricity, Hubbert’s prediction of global peak oil might well come to pass.

Some might point to the emerging middle class in China, India, Brazil, and elsewhere and suggest that the demand for automobiles is just ramping up. While there is no denying this increasing demand for automobiles, but how will those vehicles be powered? Jerry Matecun, portfolio manager at Integrated Wealth Counsel (www.integratedwealth.com), notes that there is intense interest in renewable energy by emerging market governments. During the past two years, he attended conferences in Singapore and Beijing whose focus was just that. So, it might well be that global consumption of oil will peak out this decade and, in the face of price-competitive energy alternatives, its price begins to fall.

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Thank you for a very interesting piece. Without disagreeing with anything that you have written, I would like to add a bit.

There are actually several different crude oil markets, not just one. Refineries are generally built with a particular type of crude oil in mind and cannot process other types. Sweet crude is low in sulfur which makes it cheaper to refine. Higher sulfur crudes are called “sour”. Light crudes have low wax content, with lower density and API viscosity. This makes it cheaper to pump, ship, and refine light crudes. Light crudes also produce more gasoline than heavy crudes on a per barrel basis. This means that the price the for sweet, light crudes is higher than other heavier or sour crudes. It is no coincidence that the bench mark oils, like North Sea Brent or West Texas, are light sweet crudes. Shale oils are all very heavy and produce even less gasoline per “barrel” than do traditional heavy crude oils.

This distinction has a important impact on the balance of supply and demand because there is imbalance between production and refining capacity. Refineries designed to distill sour crudes cannot distill sweet and vice versa. The same is true for light vs. heavy crudes as well. The problem is that 75% of the world’s crude is sour but something like 40% of the world’s refineries are geared to sweet crude.

Further, world production of sweet light crudes has indeed peaked, which means the imbalance between production capacity and refining capacity will increase. The recent shut down in Libya’s production of sweet light crude has further thrown off the supply side of the equation. Other producers of sweet and light crudes like Nigeria simply cannot produce any more. While the Saudi’s production can increase to fill the gap, they have only sour and heavy crudes, which does nothing for the 40% of refineries geared toward sweet light. The remaining refineries geared toward heavier sour crudes are already operating near capacity.

So it even if total crude production did not peak, increased production would come from heavy crude oils and shale oil which produce less gasoline per barrel. This means gasoline production will peak before crude oil production peaks.

The precursor to an electric car affordable by the masses is of course an actual battery. In terms of affordability, ALL the car batteries we have are a failure: woefully little power stored, far too pricey, too short lived, too bulky/heavy, poor cold weather performance, etc, etc. Long term we need to make happen to batteries something analogous to what occurred with electronics; it started with huge expensive vacuum tubes made of scarce metals and evolved to microscopically small transistors made from what is the most common element in the earth’s crust.

The great obstacle to paying the billions or hundreds of billions to the best physicists in the world to discover the secret to REAL storage batteries is the total disrespect by China, mainly, for intellectual property rights. Who will spend a huge amount of private money for such a precious discovery with the pirates just waiting to rip off? And government money? If they had any comprehension for how to go about this it would already be done or in the works. Not, on both counts. Therefore the US is likely to switch to natural gas power before we get affordable electric cars. I am 100% with you and your wishful thinking for electric cars since an electric car who’s designers have exploited everything electric power offers, will look and perform like this: Four electric motors, each coupled for simple direct drive to one of the four wheels. The motors made from low resistance (near-superconducting) material and capable of making hundreds of horsepower at two RPM, enabling 100% electrical braking. No friction braking system whatever. Wheels assemblies which are relieved of the mass/weight of brake calipers plus rotors, etc., will give suspension unheard of performance since the natural frequency (vertical motion of the wheels) goes way up. Much smoother ride, tires in contact with the road more of the time, which means faster around curves and much faster on rough surfaces like gravel. BTW, the low resistance material will transform machine/robot actuation. This field is still in the dark ages compared to the computers which control them. With advanced actuation technology inventors will have a field day turning out thousands of new machines to relieve millions of people from dangerous and boring jobs. Once again it will happen because the engineering is more easily done and the products made for far less.

Oil is a unique resource in that it wears not just one hat (transportation) in the servicing of our current civilization. It actually wears seven hats (bound up in the following extensive laundry list: plastics, fertilizers, pesticides, over 90% of all industrial chemicals, asphalt roads, most pharmaceuticals, over 98% of all medical equipment and disposable medical supplies, machine lubrication, home heating, electrical generation, lamp lighting, exotic materials smelting, etc). If it were just one or two hats, we MIGHT be able to transition away from our usage of oil with a smoothness and a lack of social and economic disruption. But because it wears seven, there is no realistic way to achieve such a civilization-transforming migration during what little time remains between now and the moment when demand outstrips supply. The agricultural component alone should be enough to make most thinking persons pause.

Too many people merely assume cars are the only thing that an oil shortage will impact. But all of modern life itself will be impacted. And there is no substitute for oil when trying to manufacture plastics, or pave roads, synthesize PV solar panels, or smelt the exotic metals needed in the blades of a wind turbine.

The United States GAO under the Bush administration contracted a research firm to determine what would be needed to transition the USA away from oil. The report (called the Hirsch Report 2005) concluded that the USA needed no less than 20 years and 3 trillion dollars to retool itself and secure a “smooth landing” of our civilization onto an alternative platform of oil-free technology (a platform of technology that doesn’t even exist yet). But here in the year 2011, not only have we not done anything in the 6 years since that report, but Peak Oil has already arrived, the prescribed 20 years is no longer available to us, and our economy is flat broke.

The current waves of what is called “demand destruction” in present day oil sales continue to vacillate the global demand for oil up and down. Those vacillations AT THIS TIME mostly represent portions of the oil market that are merely non-essentials (excess driving which can be curtailed, frivolities of all sorts). And when non-essentials get abandoned, the economy takes downturn. However, underneath those layers of excess fat and silliness in our daily oil usage lie the bare bones necessities of our way of life which we haven’t yet had to sacrifice (medicine, heating, plastics, asphalt, etc). But when the day comes when we DO have to sacrifice actual necessities, there simply isn’t enough maneuvering room in the structure of our economy, nor in the machinery of global commerce to let us adapt easily while still keeping the entire behemoth of “globalism” afloat without a hitch. Nor is there any scalability to the skimpy menu of alternatives to allow us to wiggle free of this oil trap we’ve built into the very foundations holding up our whole civilization.

The scenario of Peak Oil is a civilization-toppling event waiting to get triggered. It is a true Achilles heel if there ever was one. And we haven’t the time (20 years) or the resources (3 trillion dollars) at this late date to try and achieve the desired “smooth sailing” or “soft landing” transition away from it.

We WILL transition away from oil, (the main thesis of this Forbes article), of that there is no doubt. But the process won’t be smooth, and the landing won’t be soft. This will all be prove to be a painful and messy slow-motion train wreck stretched out over a 30 year period of relentless planet-wide upheaval. Businesses will fail. Commercial shipping will be disrupted. Production of food will shrink. Delivery of food and medicine and other vital goods will become unreliable. Nations will collapse. And people will die in the disorder that will arise. They will die from a lack of adequate medical care, sporadic lapses in public sanitation, scarcity of food, power outages, and civil unrest.

After the smoke has cleared, medicine will not be the same. Agriculture will cease to be a global enterprise. The human population of this planet will no longer be in the high 9-digits.

The 20th century will be looked upon by our descendants as a golden age of leisure where we piddled away one of the greatest gifts of nature mankind every discovered.

If oil production in the world has or will reach its peak sometime in the future. The US is still sitting on vast reserves which current and maybe future administrations refuse to produce. Isn’t that an invitation by ouside forces to put pressure on this country maybe even invite war on us to provide oil to a thirsty world? Just something that needs asking.

Peak oil is not about running out of oil. P.O means declining global production no matter what you do. Everything runs on oil including alternatives. The author seem to have lived under a rock this last 5 years. The debate is now how do we manage this new epoch of contraction with no capitals left, thanks to the moppets of Wall street and their greed.